The year 2021 has been characterised by looming changes in business models, new ways of thinking and doing business. The race to source for and the need to incentivise executives enough to ensure they can deliver on organisations’ annual and long-term strategy are noteworthy.
Post Covid-19, executives have mostly been in the web of either building from ground zero because of the looming effect of the pandemic, reopening projects to catch up with lost time or reimagining the status quo to future proof the organisation. The demand for a strong and resilient executive team with diverse skills, backgrounds and experience to make reasoned assumptions about the present and the future of businesses is at an all-time high.
Talent is not low-priced at this level of exposure and experience; hence, compensation committees are pressured to incentivise executives in a competitive and directed manner to address the fluidity of business direction while they steer the organisation through turbulent times.
That is why determining compensation metrics by assessing performance targets has never been more challenging for compensation committees than in recent times. However, the basics still have to be adopted;
- The process must begin with a clear understanding of the present strategy
- The metric should reward behaviours that align with long term share performance
- There should be clarity about the difference in performance objectives of your annual incentive plan compared to long term plan
Beyond the basics, care must be taken in incentivising risk. It is established that today’s uncertainty calls for risky actions than fear. However, compensation committees must ensure that the metric incentivises only an appropriate level of risk. Recent market events have shifted the focus to risks that may be particularly difficult to identify and manage that may be inherent in incentive compensation arrangements.
Post the disruption amidst Covid-19; It has become even more salient for executive compensation to provide a highly competitive compensation opportunity. However, while ensuring competitiveness, they must also be conscious of the stretch in their target setting, especially when looking through the internal-external relative lens. Committees should not take a position that demotivates the management by continuously raising the bar because targets were met in the preceding years.
Compensation consultants can add value to the process through in-depth analysis of contributing variables in an organisation’s unique business environment and industry. For greater insight into best practices in executive compensation planning and personnel management from seasoned professionals, please send an email to people@phillpsconsulting.net
Written by:
Kelvin Chiazor
Consultant
